MERA Issues Its First Car Audio Business Survey

By Amy Gilroy -- TWICE, 11/15/1999

The first cost-of-doing business survey ever performed for car audio retailers has been released by MERA (Mobile Electronics Retailers Association), providing insight into which factors boost dealer profitability.

Over 40 MERA members participated in the survey by sending their financial and P & L (profit and loss) statements to a third-party accounting firm. The result was a car audio retailer profile of average sales volumes, profitability, employee compensation, sales per employee, expenses, overhead and other costs of doing business.

Operations director Rick Mathies said the survey helps retailers answer the questions, "Am I paying too much for rent; spending enough or too little on advertising, on reimbursing salespeople, etc.? For the first time a 12-volt store can compare against a standard. This is one of the single most effective ways for a dealer to increase profitability, we've found from the past."

MERA hopes to eventually expand the survey to 100 retailers and use it to create separate SIC codes (a financial reference code for each type of business) for the autosound industry.

"Until now, if a 12-volt store went to the bank for a line of credit, the bank would throw in 12-volt stores with those of appliance and electronics stores. This made 12-volt store margins, comparatively, look higher, but sales per square foot would look lower. And bankers don't like confusion, they want their numbers to match," Mathies explained.

Added MERA CEO Joseph Cavanaugh, "TV/appliance stores have virtually nothing in common with us. We have different margins, different per-square-foot sales, installation facilities, etc. Eventually, we'd like to see our business get its own codes."

The MERA survey divides retailers into three volume categories. It found that dealers selling less than $1 million annually had an average gross margin of 43%, those selling $1 million to $2.5 million had a 50.5% gross margin, and for those selling more than $2.5 million annually, the average gross margin fell to only 38.5%.

One explanation for the lower margins in higher-volume stores is that "those dealers are trying to grow their volume by being more competitive with larger superstores," suggested Cavanaugh. Some of the higher-volume dealers also carry home audio and video products, which carry lower margins.

Margins increased for the middle category compared to the low-volume category because "they are buying in large enough volume to take all their discounts, to get rebates, and to buy direct from manufacturers. Smaller, under-$1 million stores tend to rely on distributors, which reduces their margins. They often don't have access to cash discounts and rebates," said Cavanaugh.

Combining all sales volumes, the study found that the average MERA dealer has an average margin of 43%. The study also broke out high-profit dealers (the 25% most profitable) versus the average dealer (remaining 75% of MERA respondents) and found that the high-profit retailers had a margin of 46.8%.

Across all sales volumes, the average MERA dealer's pretax profit is 2.8% of sales. When broken out by volume: under-$1 million dealers have a pretax profitability average of 2.8%; $1 million to $2.5 million dealers have a profitability of 4%; and over-$2.5 million dealers have a profitability of 1.3% (see chart at top). Cavanaugh attributed the lower profits of the highest-volume retailers to competition with superstores.

The study found that the average MERA salesperson (across all volume categories) sells $310,000. Broken down by volume, MERA dealers in the lowest-volume category average $255,000 per salesman, in the mid-volume range average $380,000 per year per salesman, and in the highest average $263,000 per salesman (see chart at right).

For all MERA re-spondents, the average dealer compensation per salesperson is 12.7% of his sales, while high-profit MERA dealers compensate at a rate of 19.3%. "That's really high," said Cavanaugh. "So if you have a salesman generating $300,000, he's making just under $60,000. That's a lot."

The study also looked at owner compensation for the average MERA dealer and found he is paid 5% of sales. Owners of higher-profit dealers earn 6.4% of sales.

Cavanaugh found owner compensation rates were also surprisingly high. "If a dealer's volume is $2 million, and he's a high-profit dealer-owner, he would be earning $128,000 a year."

MERA examined regional trends as well, dividing the country into five segments: Northeast, Midwest, East, Rocky Mountains and Central Plains, and West Coast.

Margins were highest in the West Coast at 52.9%, followed by the Rocky Mountain area at 46.5% and then the East at 45.5%. The lowest margins were found in the Midwest at 38.1% followed by the Northeast at 42.9%.

Pretax profit margins were almost inversely proportionate to margins, with the highest pretax profit margins occurring in the Northeast region at 4.2%, followed by the Midwest at 3.8% and the Rocky Mountains at 2.9%. The lowest margins were found in the East and West Coast regions, each at 1%.

For a copy of the MERA cost-of-doing business report, call (800) WHY-MERA.